The U.S. Securities and Exchanges Commission (SEC) has opened a full-scale investigation into Coinbase for allegedly listing securities on its platform, barely days after accusing an ex-employee of insider trading.
Bloomberg reported that Coinbase faces a probe by the SEC for allowing Americans to trade unregistered securities. According to the insiders, the SEC has increased its watch on Coinbase’s dealings since the exchange increased the number of tokens available for trading.
Currently, there are over 150 assets available for trading on Coinbase and if the SEC’s claim holds water, the exchange may have to register with the commission in accordance with Section 6 of the Securities Exchange Act of 1934.
Paul Grewal, Coinbase’s legal officer, reacted to the report by saying that the exchange had no skeletons in its closet.
“I’m happy to say it again and again: we are confident that our rigorous diligence process – a process the SEC has already reviewed – keeps securities off our platform, and we look forward to engaging with the SEC on the matter,” Grewal said.
Coinbase and SEC walking a tightrope
The SEC and Coinbase have clashed previously on several issues on whether tokens are securities. The latest altercation came after the Commission accused Coinbase’s former employee of insider trading by tipping off his brother to buy tokens before listing on the exchange.
The SEC noted that nine of the assets traded by the accused were securities, indirectly claiming that Coinbase had listed securities without its consent. Coinbase immediately defended itself with a strongly-worded blog post titled “Coinbase does not list securities. End of story.”
Last year, Coinbase had a close shave with the Commission over its lending product and was forced to abandon it when the SEC threatened legal action. Coinbase has also confirmed that it had “received investigative subpoenas” from the Commission and has always complied with directives.
SEC’s reliance on the Howey test
In determining whether an asset is a security, the SEC typically relies on the 1946 case between the Commission and W.J. Howey Co. Famously known as the Howey test, certain elements must be present for a transaction to fall under the ambit of securities law.
According to the courts, securities law will apply if the transaction involves “an investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.”
Flowing from the above, Gary Gensler, SEC Chair has stated that several cryptocurrencies are securities and this stance has formed the bulwark of its case against Ripple Labs over the sale of XRP.
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